The drafts resulted from the European Securities and Markets Authority (ESMA) guidelines on performance-based remuneration in UCITS and certain types of AIF (ESMA34-39-992) for better alignment with the German Investment Act (Kapitalanlagesetzbuch (KAGB)).
The proposed building blocks meet the minimum regulatory requirements according to the KAGB; other regulations and formulations will be accepted by BaFin as long as they meet the minimum transparency and appropriateness requirements of the proposed modules.
The model modules are intended to serve as guidelines to enable the classification of cost regulations that are deemed reasonable by BaFin and can therefore be approved. BaFin thus discloses its administrative practice in approving cost regulations in the investment terms and conditions of open-ended public investment funds and pursues the avoidance of impairing investor interests through unreasonable costs, fees, and practices.
The amendments to BaFin’s previous model modules are editorial in nature but also include clarifications of and adaptations to the aforementioned regulations.
The following changes are particularly noteworthy:
The provision regarding the reimbursement of expenses for securities lending transactions and repurchase agreements no longer falls under Section I.1. “Management fees payable to the Company” due to their nature as reimbursement of expenses. Instead, the provision falls under Section I.5. “Expenses.” The wording has been adapted to align with the KAGB, as amended by the FoStoG with the new section 200 (1) sentence 2 KAGB, and with the relevant ESMA guidelines.
Section I.5.s) now only refers to taxes related to expenses with securities lending transactions and securities repurchase agreements. Other taxes related to remuneration payable to the Company, the Depositary, and third parties, and related to administration and custody, are covered by previous items I.1. to I.4.
Previously, BaFin’s building blocks only showed the definition of the settlement period for the performance fee. This has now been amended, and the drafts include definitions for the settlement periods for the fixed fee. The definitions can be found in I.16., II.2., and III.4. of the templates.
In accordance with the ESMA guidelines (Q&A 5 on page 61 of ESMA34-43-392 and Q&A 7 on page 59 of ESMA34-32-352), the draft regarding open-ended public investment funds without real estate assets contains an addition to the explanatory note on II. “Performance fee.” This states that in the case of outsourcing portfolio management to several third parties, the individual portfolio manager is not entitled to a performance fee if that manager achieves a defined success but the unit value performance of the investment fund as a whole does not meet the requirements for a performance fee.
Furthermore, the drafting note on II. “Performance Fee,” in the sense of Q&A 4 on page 60 of ESMA32-43-392 and Q&A 6 on page 59 of ESMA34-32-352 and with regard to open-ended funds without real estate investment funds, adds that the reference period for the unit performance of the transferring investment fund also applies to the acquiring newly established investment fund if the investment policy does not change significantly.
In both drafts, the editor’s note on Performance Fee Alternative 1 has been adjusted to now refer to “at least 51%” instead of “more than 50%.”
The processing notes on Performance Fee Alternative 2 most recently limited the applicability of this. This restriction is already provided for in Performance Fee Alternative 3. According to this, a high-water mark model cannot be selected if investment conditions include a definition of the investment focus and a suitable benchmark can be defined.
The consultation will continue until May 15, 2023, until which time BaFin will provide the opportunity to submit comments and observations on the drafts.
Client Alert 2023-081